Abstract

The external reserves‑economy relationship argument has generated debate
due to unsatisfactory theoretical and empirical consensus. This paper provides an
economic assessment and empirical insight to the debate in Nigeria. Towards this,
the paper used secondary data from CBN statistical bulletin (1994 ‑ 2005). The
outputs generated revealed that external reserves exceeding the three months
benchmark equivalent was in excess: its holding cost was high. In addition, the
results suggested dual fold interpretation of the analyses: 1) holding of external
reserves do promote exchange rate stability, 2) positive relationship exists
between external reserves and exports; however, the relationship was not
significant, hence suggesting that export was not induced significantly by the
nation’s external reserves. The paper suggests that domestic production efficiency
is required not really external reserve accumulation to improve macroeconomic
performance.